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Property: don't let lenders put you off downsizing
Downsizing your property to release cash for retirement is not always possible, but it often has fewer pitfalls than equity release schemes.
Managing your finances in retirement is not easy but it is made much more difficult by the vested interests of financial institutions and advisers. Latest research from Safe Home Income Plans – Ship, the trade body for equity release – maintains that downsizing is not always a viable option – which is true. But then goes on to suggest that equity withdrawal could be a better answer. Well, it would, wouldn’t it?
Equity withdrawal may be the best solution to releasing cash to subsidise retirement if you want to stay in your existing home. But the constraints on downsizing are more to do with the current value of your property and the amount of cash you can release by downsizing than anything else. Bear in mind too that many people coming up to retirement want to downsize because the house is too large for them, they no longer need the space and the cost of upkeep is relatively more expensive. Others simply want to leave the city for the country.
Equity release allows elderly homeowners to borrow cash against the security of their home at a fixed rate, currently 7% to 8%, to subsidise income or use for other purposes such as repairs and maintenance or buying a new car. The interest charge is rolled up and the total debt repaid when the property is sold. You can borrow either a lump sum, or arrange a borrowing facility and draw down cash when you need it. The drawdown scheme is cheaper and more popular because the interest doesn’t roll up so fast.
Ship points out that over 55s generally own properties which are worth more than other age groups so downsizing to release equity – while remaining in the same area – may be an option. Ship then claims that a review of 25 UK local authorities with a high density of over 55s shows that in almost a third (32%) of cases, ‘people looking at this option would either be worse off or not release sufficient money to make it worth while when all costs were taken into account.’
Your property’s value deciding factor
This is nonsense – using averages is misleading. In all local authorities there is a wide range of properties and the factor which makes downsizing viable is what your property is worth today. If it is only worth, say, £250,000 you will have difficulty finding something smaller which will release enough capital to make downsizing worthwhile. Depending on where you live and whether you are prepared to accept a less attractive or smaller property, or move to another area, it is not impossible. However, if your home is worth £500,000 or more, there is plenty of choice of properties in the £250,000 bracket in almost all areas which would make downsizing a realistic option.
Ship quotes average house prices for over 55s and compares them with average house prices in the area. In Dorset, for example, it quotes the average value of over-55s homes as £177,009 while the average property value in the county is £252,960.
Clearly in this situation it would be difficult to downsize unless you are prepared to move to an area where property prices are cheaper – not something people usually want to do unless they are moving from a city to retire to the country. Other areas where the average value of over 55s property is lower than the average for the county include Herefordshire, Worcestershire, Cheshire East, North Yorkshire and Shropshire.
But that doesn’t mean to say that owners of more valuable homes cannot downsize.
In Dorset, for example, a relatively wealthy area, there are no doubt hundreds of thousands of older homeowners with properties worth £500,000 or more who could easily find something suitable at £250,000 to £300,000 thereby releasing at least £200,000 to subsidise income in retirement. Very often a small cottage in a town which is nearer shops and transport is less than half the price of a detached cottage in a rural area only a few miles away. And it’s more convenient for an older person.
Areas where the average value of over 55s homes is substantially higher than the county average include Lincolnshire, Cleveland, Northumberland, Norfolk, parts of Sussex, Yorkshire and Somerset so homeowners in these areas have plenty of choice when downsizing.
Everyone’s circumstances are different
Andrea Rozario, director general of Ship, admits that, ‘for many people, the home is their largest asset and releasing some of the equity will help them finance their retirement. The best way in which to do this depends on each individual’s financial situation and preferences. However, equity release and downsizing should both be considered – they are not mutually exclusive and can work very well in conjunction.’ She is right.
But bear in mind that those who opt for equity release instead of downsizing will be paying at least 7% fixed, possibly more near 8%, for their borrowing, which means their debt doubles every 10 years. A person with a home worth £500,000 who borrows £50,000 at 7% and lives for 20 years will end up owing £200,000.
A person who downsizes from a £500,000 home to a £250,000 home has £250,000 to subsidise income instead of just £50,000 – and no mortgage debt. While both will undoubtedly see an increase in the value of their property, the person who downsizes has greater freedom and flexibility and will enjoy a better standard of living in retirement. Remember, however much you love your current home, you can't take it with you –and your children will probably sell it anyway!
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